Are you interested in looking up the daily wholesale prices of electricity and using that information to decide when and how long you'll run the air conditioning or the gas dryer? Ready or not, variable pricing is about to invade your home.


The trend towards variable pricing is becoming more pronounced. Variable pricing, or pricing based on supply and demand, seasonality, or other events is changing the way airline and ballpark seats are sold, and is even transforming decades old "cost plus" pricing models in the manufacturing industry. But let's not stop there; according to a recent Wall Street Journal article, "Letting the Power Company Control Your AC," variable pricing is about to invade the home.

The article discusses how utility companies across the United States are experimenting with variable pricing models to moderate energy consumption. Pricing for gas and electricity can now be based on time of day and amount of energy used. In an effort to encourage homeowners and businesses to conserve energy, the article notes, "utilities are putting sophisticated tools in consumers' hands, such as online calculators, advanced electric meters, in-home displays, remote-control devices and innovative pricing plans."

For some utilities, flat-rate pricing is out and variable pricing is in. The article mentions how consumers can now check a website for daily electricity rates and use that information to make energy choices. "Just giving people information has an impact on how they use energy," says Dana Yeganian, a spokeswoman for Progress Energy in Raleigh North Carolina.

A key to the adoption of variable pricing is to ensure pricing information is easily accessible and available. It also helps to provide incentives and education to encourage a change in behavior. For example the article notes, "On a late June day, with temperatures in the mid-90s, power prices were expected to range from a low of 4 cents a kilowatt hour at 3 a.m. to a high of 10 cents by 4 p.m." The article mentions how a consumer used this information to make a choice to run her dishwasher at night and not be so quick to turn on the air conditioning.

Some states are requiring utilities to adopt variable pricing models. The article highlights a new Illinois law requiring utilities to, "offer real-time pricing programs so consumers have an incentive to shift their energy use away from the costliest periods. Over time, (the law) should reduce overall power costs by tapping the most expensive generating (power) plants less."

In the utility market, variable pricing seems to make sense to help control energy consumption. However, in this example, the implementation of variable pricing also means more consumer choices abound, and therefore marketing dollars will need to be spent on consumer education and awareness.

Consumers will need to understand the financial impact of their decisions. If I run my air conditioning at 78 degrees instead of 76 degrees, how much money will take save me per month? Is the benefit significant or negligible?

Utility companies also realize there will be resistance (overt and covert) during the switch to variable pricing. Consumers are already overwhelmed with choice, and adding more choice to the mix means another aspect of life that must be "managed".

There's also the potential for customer service nightmares. Utilities that neglect to invest the proper amount of money to educate and inform consumers about variable pricing options might find themselves deluged with irate customers with outrageous utility bills at month's end.

As the utility examples show, variable pricing isn't just for improving profitability and maximizing revenues–it can be used to actually minimize consumption of scarce and costly resources.

With more industries using technologies such as data warehousing and analytics to implement variable pricing models and programs, I'd like to ask–are you prepared for the shift to variable pricing?

When your utility company adopts variable pricing, will it change the way you consume energy?

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ABOUT THE AUTHOR
Paul Barsch directs services marketing programs for Teradata, the world's largest data warehousing and analytics company. Previously, Paul was marketing director for HP Enterprise Services $1.3 billion healthcare industry and a senior marketing manager at global consultancy, BearingPoint. Paul is a senior contributor to MarketingProfs, a frequent columnist for MarketingProfs DailyFix, and has published over fifteen articles in marketing, management, technology and healthcare publications. Paul earned his Bachelors of Science in Business Administration from California Polytechnic State University, San Luis Obispo. He and his family reside in San Diego, CA.